MEMBERS' HANDBOOK

PROFESSIONAL ETHICS STATEMENT
1.203A
INDEPENDENCE FOR ASSURANCE ENGAGEMENTS

(Issued November 2003)

         
Contents

Paragraphs

Introduction

1 - 3

Independence for assurance engagements

4 - 7

A conceptual approach to independence

8 - 19

Objective and structure

20 - 23

Threats to independence

24 - 29

Safeguards

30 - 39

Engagement period

40 - 42

Compliance with the IFAC Code of Ethics

43

Effective dates

44 - 45

         

PROFESSIONAL ETHICS STATEMENT
1.203A
INDEPENDENCE FOR ASSURANCE ENGAGEMENTS

(Issued November 2003)

       

INTRODUCTION

       
1. This Statement sets out the ethical requirements in relation to independence for assurance engagements conducted by professional accountants in public practice.
       
2. To assist professional accountants in public practice in the application of the principles of independence for assurance engagements, examples are presented in Guidance 1.308 "Independence for assurance engagements". The examples describe specific circumstances and relationships that may create threats to independence and the safeguards that may be appropriate to eliminate the threats or reduce them to an acceptable level in each set of circumstances. The examples presented in Guidance 1.308 are intended to illustrate the application of the principles in this Statement and are not intended to be, nor should they be interpreted as, an exhaustive list of all circumstances that may create threats to independence. Consequently, it is not sufficient for a member of an assurance team, a firm or a network firm merely to comply with the examples presented, rather they should apply the principles in this Statement to the particular circumstances they face.


Sometimes, the threats to independence are so significant that the only possible actions are to eliminate the activities or interest creating the threats, or to refuse to accept or continue the assurance engagement.
       
3. In this Statement, the following expressions have the following meanings
assigned to them:
 
(a) Assurance client An entity in respect of which a firm conducts an assurance engagement.
       
(b) Assurance engagement An engagement conducted to provide:
    (i) a high level of assurance that the subject matter conforms in all material respects with identified suitable criteria; or
    (ii) a moderate level of assurance that the subject matter is plausible in the circumstances.
    This would include an engagement in accordance with Standards on Assurance Engagements (SAEs) issued by the HKICPA or International Standard on Assurance Engagements or in accordance with specific standards for assurance engagements issued by the HKICPA or the International Auditing and Assurance Standards Board such as an audit or review of financial statements in accordance with Statements of Auditing Standards (SASs) or International Standards on Auditing.
       
(c) Assurance team (i) All professionals participating in the assurance engagement;
    (ii)

All others within a firm who can directly influence the outcome of the assurance engagement, including:

  • those who recommend the compensation of, or who provide direct supervisory, management or other oversight of the assurance engagement partner in connection with the performance of the assurance engagement. For the purposes of an audit engagement this includes those at all successively senior levels above the lead engagement partner through the firm's chief executive;

  • those who provide consultation regarding technical or industry specific issues, transactions or events for the assurance engagement; and

  • those who provide quality control for the assurance engagement; and
    (iii) For the purposes of an audit client, all those within a network firm who can directly influence the outcome of the audit engagement.
       
(d) Audit client An entity in respect of which a firm conducts an audit engagement. When the audit client is a listed entity, audit client will always include its related entities.
       
(e) Audit engagement An assurance engagement to provide a high level of assurance that financial statements are free of material misstatement, such as an engagement in accordance with SASs and Auditing Guidelines issued by the HKICPA or International Standards on Auditing. This includes a Statutory Audit which is an audit required by legislation or other regulation. For the purpose of this Statement, this also includes a reporting engagement performed by reporting accountants.
       
(f) Close family A parent, non-dependent child or sibling.
       
(g) Direct financial interest

A financial interest:

  • owned directly by and under the control of an individual or entity (including those managed on a discretionary basis by others); or


  • beneficially owned through a collective investment vehicle, estate, trust or other intermediary over which the individual or entity has control.
       
(h) Directors and officers Those charged with the governance of an entity, regardless of their title, which may vary from country to country.
       
(i) Employed professional accountant A professional accountant employed in industry, commerce, the public sector or education.
       
(j) Existing accountant A professional accountant in public practice currently holding an audit appointment or carrying out accounting, taxation, consulting or similar professional services for a client.
       
(k) Financial interest An interest in an equity or other security, debenture, loan or other debt instrument of an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest.
       
(l) Firm (a) A sole practitioner, partnership or corporation of professional accountants;
    (b) An entity that controls such parties; and
    (c) An entity controlled by such parties.
       
(m) Immediate family A spouse (or equivalent) or dependent.
       
(n) Indirect financial interest A financial interest beneficially owned through a collective investment vehicle, estate, trust or other intermediary over which the individual or entity has no control.
       
(o) Lead engagement partner In connection with an audit, the partner responsible for signing the report on the consolidated financial statements of the audit client, and, where relevant, the partner responsible for signing the report in respect of any entity whose financial statements form part of the consolidated financial statements and on which a separate stand-alone report is issued. When no consolidated financial statements are prepared, the lead engagement partner would be the partner responsible for signing the report on the financial statements.
       
(p) Listed entity An entity whose shares, stock or debt are quoted or listed on a recognized stock exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent body.
       
(q) Network firm An entity under common control, ownership or management with the firm or any entity that a reasonable and informed third party having knowledge of all relevant information would reasonably conclude as being part of the firm nationally or internationally.
       
(r) Practice A sole practitioner, a partnership or a corporation of professional accountants which offers professional services to the public.
       
(s) Professional accountant Those persons, whether they be in public practice (including a sole practitioner, partnership or corporate body), industry, commerce, the public sector or education, who are members of the HKICPA.
       
(t) Professional accountant in public practice Each partner or person occupying a position similar to that of a partner, and each employee in a practice providing professional services to a client irrespective of their functional classification (e.g., audit, tax or consulting) and professional accountants in a practice having managerial responsibilities. This term is also used to refer to a firm of professional accountants in public practice.
       
(u) Professional services Any service requiring accountancy or related skills performed by a professional accountant including accounting,auditing, taxation, management consulting and financial management services.
       
(v) Related entity An entity that has any of the following relationships with the client:
    (i) An entity that has direct or indirect control over the client provided the client is material to such entity;
    (ii) An entity with a direct financial interest in the client provided that such entity has significant influence over the client and the interest in the client is material to such entity;
    (iii) An entity over which the client has direct or indirect control;
    (iv) An entity in which the client, or an entity related to the client under (iii) above, has a direct financial interest that gives it significantinfluence over such entity and the interest is material to the client and itsrelated entity in (iii); and
    (v) An entity which is under common control with the client (hereinafter a "sister entity") provided the sister entity and the client are both material to the entity that controls both the client and sister entity.
       

INDEPENDENCE FOR ASSURANCE ENGAGEMENTS

       
4. It is in the public interest and, therefore, required by this Statement, that members of assurance teams, firms and, when applicable, network firms be independent of assurance clients.
       
5. Assurance engagements are intended to enhance the credibility of information about a subject matter by evaluating whether the subject matter conforms in all material respects with suitable criteria. The SAEs issued by the HKICPA and International Standard on Assurance Engagements issued by the International Auditing and Assurance Standards Board describe the objectives and elements of assurance engagements to provide either a high or a moderate level of assurance. The HKICPA and the International Auditing and Assurance Standards Board have also issued specific standards and guidelines for certain assurance engagements. For example, SASs and International Standards on Auditing provide specific standards for audit (high level assurance) and review (moderate level assurance) of financial statements.
       
6. Sub-paragraphs 6(a) through 6(d) are taken from SAE 100 "Framework for assurance engagements intended to provide either a high or moderate level of assurance" and the International Standard on Assurance Engagements and describe the nature of an assurance engagement. These sub-paragraphs are presented here only to describe the nature of an assurance engagement. To obtain a full understanding of the objectives and elements of an assurance engagement it is necessary to refer to the full text contained in SAE 100 and the International Standard on Assurance Engagements.
       
  (a) Whether a particular engagement is an assurance engagement will depend upon whether it exhibits all the following elements:
    (i) A three party relationship involving:
- A professional accountant;
- A responsible party; and
- An intended user;
    (ii) A subject matter;
    (iii) Suitable criteria;
    (iv) An engagement process; and
    (v) A conclusion.
    The responsible party and the intended user will often be from separate organizations but need not be. A responsible party and an intended user may both be within the same organization. For example, a governing body may seek assurance about information provided by a component of that organization. The relationship between the responsible party and the intended user needs to be viewed within the context of a specific engagement.
       
  (b)

There is a broad range of engagements to provide a high or moderate level of assurance. Such engagements may include:

  • Engagements to report on a broad range of subject matters covering financial and non-financial information;

  • Attest and direct reporting engagements;

  • Engagements to report internally and externally; and

  • Engagements in the private and public sector.
       
  (c)

The subject matter of an assurance engagement may take many forms, such as the following:

  • Data (for example, historical or prospective financial information, statistical information, performance indicators);

  • Systems and processes (for example, internal controls); or

  • Behaviour (for example, corporate governance, compliance with regulation, human resource practices).
       
  (d)

Not all engagements performed by professional accountants are assurance engagements. Other engagements frequently performed by professional accountants that are not assurance engagements include:

  • Agreed-upon procedures;

  • Compilation of financial or other information;

  • Preparation of tax returns when no conclusion is expressed, and tax consulting;

  • Management consulting; and

  • Other advisory services.
       
7. This Statement provides a framework, built on principles, for identifying, evaluating and responding to threats to independence. The framework establishes principles that members of assurance teams, firms and network firms should use to identify threats to independence, evaluate the significance of those threats, and, if the threats are other than clearly insignificant, identify and apply safeguards to eliminate the threats or reduce them to an acceptable level. Judgment is needed to determine which safeguards are to be applied. Some safeguards may eliminate the threat while others may reduce the threat to an acceptable level. Where safeguards are insufficient to reduce a threat to an acceptable level, the only possible actions to be taken are therefore to eliminate the activities or interests creating the threat or to refuse to accept or continue the assurance engagement. This Statement requires members of assurance teams, firms and network firms to apply the principles to the particular circumstances under consideration. The examples presented in Guidance 1.308 are intended to illustrate the application of the principles in this Statement and are not intended to be, nor should they be interpreted as, an exhaustive list of all circumstances that may create threats to independence. Consequently, it is not sufficient for a member of an assurance team, a firm or a network firm merely to comply with the examples presented, rather they should apply the principles in this Statement to the particular circumstances they face.
       

A CONCEPTUAL APPROACH TO INDEPENDENCE

       
8. Independence requires:
       
  (a) Independence of mind:

The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism.
  (b) Independence in appearance:

The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm's, or a member of the assurance team's, integrity, objectivity or professional skepticism had been compromised.
       
9. The use of the word "independence" on its own may create misunderstandings. Standing alone, the word may lead observers to suppose that a person exercising professional judgment ought to be free from all economic, financial and other relationships. This is impossible, as every member of society has relationships with others. Therefore, the significance of economic, financial and other relationships should also be evaluated in the light of what a reasonable and informed third party having knowledge of all relevant information would reasonably conclude to be unacceptable.
       
10. Many different circumstances, or combination of circumstances, may be relevant and accordingly it is impossible to define every situation that creates threats to independence and specify the appropriate mitigating action that should be taken. In addition, the nature of assurance engagements may differ and consequently different threats may exist, requiring the application of different safeguards. A conceptual framework that requires firms and members of assurance teams to identify, evaluate and address threats to independence, rather than merely comply with a set of specific rules which may be arbitrary, is, therefore, in the public interest.
       
11. This Statement is based on such a conceptual approach, one that takes into account threats to independence, accepted safeguards and the public interest. Under this approach, firms and members of assurance teams have an obligation to identify and evaluate circumstances and relationships that create threats to independence and to take appropriate action to eliminate these threats or to reduce them to an acceptable level by the application of safeguards. In addition to identifying and evaluating relationships between the firm, network firms, members of the assurance team and the assurance client, consideration should be given to whether relationships between individuals outside of the assurance team and the assurance client create threats to independence.
       
12. This Statement provides a framework of principles that members of assurance teams, firms and network firms should use to identify threats to independence, evaluate the significance of those threats, and, if the threats are other than clearly insignificant, identify and apply safeguards to eliminate the threats or reduce them to an acceptable level, such that independence of mind and independence in appearance are not compromised.
       
13. The principles in this Statement apply to all assurance engagements. The nature of the threats to independence and the applicable safeguards necessary to eliminate the threats or reduce them to an acceptable level differ depending on the characteristics of the individual engagement: whether the assurance engagement is an audit engagement or another type of engagement; and in the case of an assurance engagement that is not an audit engagement, the purpose, subject matter and intended users of the report. A firm should, therefore, evaluate the relevant circumstances, the nature of the assurance engagement and the threats to independence in deciding whether it is appropriate to accept or continue an engagement, as well as the nature of the safeguards required and whether a particular individual should be a member of the assurance team.
       
14. Audit engagements provide assurance to a wide range of potential users; consequently, in addition to independence of mind, independence in appearance is of particular significance. Accordingly, for audit clients, the members of the assurance team, the firm and network firms are required to be independent of the audit client. Similar considerations in the case of assurance engagements provided to non-audit assurance clients require the members of the assurance team and the firm to be independent of the non-audit assurance client. In the case of these engagements, consideration should be given to any threats that the firm has reason to believe may be created by network firm interests and relationships.
       
15. In the case of an assurance report to a non-audit assurance client expressly restricted for use by identified users, the users of the report are considered to be knowledgeable as to the purpose, subject matter and limitations of the report through their participation in establishing the nature and scope of the firm's instructions to deliver the services, including the criteria by which the subject matter are to be evaluated. This knowledge and enhanced ability of the firm to communicate about safeguards with all users of the report increase the effectiveness of safeguards to independence in appearance. These circumstances may be taken into account by the firm in evaluating the threats to independence and considering the applicable safeguards necessary to eliminate the threats or reduce them to an acceptable level. At a minimum, it will be necessary to apply the provisions of this Statement in evaluating the independence of members of the assurance team and their immediate and close family. Further, if the firm had a material financial interest, whether direct or indirect, in the assurance client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Limited consideration of any threats created by network firm interests and relationships may be sufficient.
       
16.

Accordingly:

  • For assurance engagements provided to an audit client, the members of the assurance team, the firm and network firms are required to be independent of the client;

  • For assurance engagements provided to clients that are not audit clients, when the report is not expressly restricted for use by identified users, the members of the assurance team and the firm are required to be independent of the client and consideration should be given to any threats that the firm has reason to believe may be created by network firm interests and relationships; and

  • For assurance engagements provided to clients that are not audit clients, when the assurance report is expressly restricted for use by identified users, the members of the assurance team are required to be independent of the client. In addition, the firm should not have a material direct or indirect financial interest in the client.


These independence requirements for assurance engagements are illustrated as follows:

   

*

Consideration should be given to any threats that the firm has reason to believe may be created by network firm interests and relationships.
       
17. The threats and safeguards identified in this Statement and Guidance 1.308 are generally discussed in the context of interests or relationships between the firm, network firms, a member of the assurance team and the assurance client. In the case of a listed audit client, the firm and any network firms are required to consider the interests and relationships that involve that client's related entities. Ideally those entities and the interests and relationships should be identified in advance. For all other assurance clients, when the assurance team has reason to believe that a related entity of such an assurance client is relevant to the evaluation of the firm's independence of the client, the assurance team should consider that related entity when evaluating independence and applying appropriate safeguards.
       
18. The evaluation of threats to independence and subsequent action should be supported by evidence obtained before accepting the engagement and while it is being performed. The obligation to make such an evaluation and take action arises when a firm, a network firm or a member of the assurance team knows, or could reasonably be expected to know, of circumstances or relationships that might compromise independence. There may be occasions when the firm, a network firm or an individual inadvertently violates this Statement. If such an inadvertent violation occurs, it would generally not compromise independence with respect to an assurance client provided the firm has appropriate quality control policies and procedures in place to promote independence and, once discovered, the violation is corrected promptly and any necessary safeguards are applied.
       
19. Throughout this Statement and Guidance 1.308, reference is made to significant and clearly insignificant threats in the evaluation of independence. In considering the significance of any particular matter, qualitative as well as quantitative factors should be taken into account. A matter should be considered clearly insignificant only if it is deemed to be both trivial and inconsequential.
       

OBJECTIVE AND STRUCTURE

       
20. The objective of this Statement is to assist firms and members of assurance teams in:
  (a) Identifying threats to independence;
  (b) Evaluating whether these threats are clearly insignificant; and
  (c) In cases when the threats are not clearly insignificant, identifying and applying appropriate safeguards to eliminate or reduce the threats to an acceptable level.
  In situations when no safeguards are available to reduce the threat to an acceptable level, the only possible actions are to eliminate the activities or interest creating the threat, or to refuse to accept or continue the assurance engagement.
       
21. This Statement outlines the threats to independence (paragraphs 24 through 29). It then analyzes safeguards capable of eliminating these threats or reducing them to an acceptable level (paragraphs 30 through 42). Guidance 1.308 sets out some examples of how this conceptual approach to independence is to be applied to specific circumstances and relationships. The examples discuss threats to independence that may be created by specific circumstances and relationships. Professional judgment is used to determine the appropriate safeguards to eliminate threats to independence or to reduce them to an acceptable level. In certain examples, the threats to independence are so significant that the only possible actions are to eliminate the activities or interest creating the threat, or to refuse to accept or continue the assurance engagement. In other examples, the threat can be eliminated or reduced to an acceptable level by the application of safeguards. The examples are not intended to be all-inclusive.
       
22. When threats to independence that are not clearly insignificant are identified, and the firm decides to accept or continue the assurance engagement, the decision should be documented. The documentation should include a description of the threats identified and the safeguards applied to eliminate or reduce the threats to an acceptable level.
       
23. The evaluation of the significance of any threats to independence and the safeguards necessary to reduce any threats to an acceptable level, takes into account the public interest. Certain entities may be of significant public interest because, as a result of their business, their size or their corporate status, they have a wide range of stakeholders. Examples of such entities might include listed companies, credit institutions, insurance companies, and pension funds. Because of the strong public interest in the financial statements of listed entities, certain paragraphs in Guidance 1.308 deal with additional matters that are relevant to the audit of listed entities. Consideration should be given to the application of the principles set out in this Statement in relation to the audit of listed entities to other audit clients that may be of significant public interest.
       

THREATS TO INDEPENDENCE

       
24. Independence is potentially affected by self-interest, self-review, advocacy, familiarity and intimidation threats.
       
25. "Self-Interest Threat" occurs when a firm or a member of the assurance team could benefit from a financial interest in, or other self-interest conflict with, an assurance client.

Examples of circumstances that may create this threat include, but are not limited to:
  (a) A direct financial interest or material indirect financial interest in an assurance client;
  (b) A loan or guarantee to or from an assurance client or any of its directors or officers;
  (c) Undue dependence on total fees from an assurance client;
  (d) Concern about the possibility of losing the engagement;
  (e) Having a close business relationship with an assurance client;
  (f) Potential employment with an assurance client; and
  (g) Contingent fees relating to assurance engagements.
       
26. "Self-Review Threat" occurs when (1) any product or judgment of a previous assurance engagement or non-assurance engagement needs to be re-evaluated in reaching conclusions on the assurance engagement or (2) when a member of the assurance team was previously a director or officer of the assurance client, or was an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement.

Examples of circumstances that may create this threat include, but are not limited to:
  (a) A member of the assurance team being, or having recently been, a director or officer of the assurance client;
  (b) A member of the assurance team being, or having recently been, an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement;
  (c) Performing services for an assurance client that directly affect the subject matter of the assurance engagement; and
  (d) Preparation of original data used to generate financial statements or preparation of other records that are the subject matter of the assurance engagement.
       
27. "Advocacy Threat" occurs when a firm, or a member of the assurance team, promotes, or may be perceived to promote, an assurance client's position or opinion to the point that objectivity may, or may be perceived to be, compromised. Such may be the case if a firm or a member of the assurance team were to subordinate their judgment to that of the client.

Examples of circumstances that may create this threat include, but are not limited to:
  (a) Dealing in, or being a promoter of, shares or other securities in an assurance client; and
  (b) Acting as an advocate on behalf of an assurance client in litigation or in resolving disputes with third parties.
       
28. "Familiarity Threat" occurs when, by virtue of a close relationship with an assurance client, its directors, officers or employees, a firm or a member of the assurance team becomes too sympathetic to the client's interests.

Examples of circumstances that may create this threat include, but are not limited to:
  (a) A member of the assurance team having an immediate family member or close family member who is a director or officer of the assurance client;
  (b) A member of the assurance team having an immediate family member or close family member who, as an employee of the assurance client, is in a position to exert direct and significant influence over the subject matter of the assurance engagement;
  (c) A former partner of the firm being a director, officer of the assurance client or an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement;
  (d) Long association of a senior member of the assurance team with the assurance client; and
  (e) Acceptance of gifts or hospitality, unless the value is clearly insignificant, from the assurance client, its directors, officers or employees.
       
29. "Intimidation Threat" occurs when a member of the assurance team may be deterred from acting objectively and exercising professional skepticism by threats, actual or perceived, from the directors, officers or employees of an assurance client.

Examples of circumstances that may create this threat include, but are not limited to:
  (a) Threat of replacement over a disagreement with the application of an accounting principle; and
  (b) Pressure to reduce inappropriately the extent of work performed in order to reduce fees.
       

SAFEGUARDS

       
30. The firm and members of the assurance team have a responsibility to remain independent by taking into account the context in which they practise, the threats to independence and the safeguards available to eliminate the threats or reduce them to an acceptable level.
       
31. When threats are identified, other than those that are clearly insignificant, appropriate safeguards should be identified and applied to eliminate the threats or reduce them to an acceptable level. This decision should be documented. The nature of the safeguards to be applied will vary depending upon the circumstances. Consideration should always be given to what a reasonable and informed third party having knowledge of all relevant information, including safeguards applied, would reasonably conclude to be unacceptable. The consideration will be affected by matters such as the significance of the threat, the nature of the assurance engagement, the intended users of the assurance report and the structure of the firm.
       
32. Safeguards fall into three broad categories:
  (a) Safeguards created by the profession, legislation or regulation;
  (b) Safeguards within the assurance client; and
  (c) Safeguards within the firm's own systems and procedures.
  The firm and the members of the assurance team should select appropriate safeguards to eliminate or reduce threats to independence, other than those that are clearly insignificant, to an acceptable level.
       
33. Safeguards created by the profession, legislation or regulation, include the following:
  (a) Educational, training and experience requirements for entry into the profession;
  (b) Continuing education requirements;
  (c) Professional standards and monitoring and disciplinary processes;
  (d) External review of a firm's quality control system; and
  (e) Legislation governing the independence requirements of the firm.
       
34. Safeguards within the assurance client, include the following:
  (a) When the assurance client's management appoints the firm, persons other than management ratify or approve the appointment;
  (b) The assurance client has competent employees to make managerial decisions;
  (c) Policies and procedures that emphasize the assurance client's commitment to fair financial reporting;
  (d) Internal procedures that ensure objective choices in commissioning non-assurance engagements; and
  (e) A corporate governance structure, such as an audit committee, that provides appropriate oversight and communications regarding a firm's services.
       
35. Audit committees can have an important corporate governance role when they are independent of client management and can assist the Board of Directors in satisfying themselves that a firm is independent in carrying out its audit role. There should be regular communications between the firm and the audit committee (or other governance body if there is no audit committee) of listed entities regarding relationships and other matters that might, in the firm's opinion, reasonably be thought to bear on independence.
       
36. Firms should establish policies and procedures relating to independence communications with audit committees, or others charged with governance. In the case of the audit of listed entities, the firm should communicate orally and in writing at least annually, all relationships and other matters between the firm, network firms and the audit client that in the firm's professional judgment may reasonably be thought to bear on independence. Matters to be communicated will vary in each circumstance and should be decided by the firm, but should generally address the relevant matters set out in this Statement.
       
37. Safeguards within the firm's own systems and procedures may include firm-wide safeguards such as the following:
  (a) Firm leadership that stresses the importance of independence and the expectation that members of assurance teams will act in the public interest;
  (b) Policies and procedures to implement and monitor quality control of assurance engagements;
  (c) Documented independence policies regarding the identification of threats to independence, the evaluation of the significance of these threats and the identification and application of safeguards to eliminate or reduce the threats, other than those that are clearly insignificant, to an acceptable level;
  (d) Internal policies and procedures to monitor compliance with firm policies and procedures as they relate to independence;
  (e) Policies and procedures that will enable the identification of interests or relationships between the firm or members of the assurance team and assurance clients;
  (f) Policies and procedures to monitor and, if necessary, manage the reliance on revenue received from a single assurance client;
  (g) Using different partners and teams with separate reporting lines for the provision of non-assurance services to an assurance client;
  (h) Policies and procedures to prohibit individuals who are not members of the assurance team from influencing the outcome of the assurance engagement;
  (i) Timely communication of a firm's policies and procedures, and any changes thereto, to all partners and professional staff, including appropriate training and education thereon;
  (j) Designating a member of senior management as responsible for overseeing the adequate functioning of the safeguarding system;
  (k) Means of advising partners and professional staff of those assurance clients and related entities from which they must be independent;
  (l) A disciplinary mechanism to promote compliance with policies and procedures; and
  (m) Policies and procedures to empower staff to communicate to senior levels within the firm any issue of independence and objectivity that concerns them; this includes informing staff of the procedures open to them.
       
38. Safeguards within the firm's own systems and procedures may include engagement specific safeguards such as the following:
  (a) Involving an additional professional accountant to review the work done or otherwise advise as necessary. This individual could be someone from outside the firm or network firm, or someone within the firm or network firm who was not otherwise associated with the assurance team;
  (b) Consulting a third party, such as a committee of independent directors, a professional regulatory body or another professional accountant;
  (c) Rotation of senior personnel;
  (d) Discussing independence issues with the audit committee or others charged with governance;
  (e) Disclosing to the audit committee, or others charged with governance, the nature of services provided and extent of fees charged;
  (f) Policies and procedures to ensure members of the assurance team do not make, or assume responsibility for, management decisions for the assurance client;
  (g) Involving another firm to perform or re-perform part of the assurance engagement;
  (h) Involving another firm to re-perform the non-assurance service to the extent necessary to enable it to take responsibility for that service; and
  (i) Removing an individual from the assurance team, when that individual's financial interests or relationships create a threat to independence.
       
39. When the safeguards available, such as those described above, are insufficient to eliminate the threats to independence or to reduce them to an acceptable level, or when a firm chooses not to eliminate the activities or interests creating the threat, the only course of action available will be the refusal to perform, or withdrawal from, the assurance engagement.
       

ENGAGEMENT PERIOD

       
40. The members of the assurance team and the firm should be independent of the assurance client during the period of the assurance engagement. The period of the engagement starts when the assurance team begins to perform assurance services and ends when the assurance report is issued, except when the assurance engagement is of a recurring nature. If the assurance engagement is expected to recur, the period of the assurance engagement ends with the notification by either party that the professional relationship has terminated or the issuance of the final assurance report, whichever is later.
       
41.

In the case of an audit engagement, the engagement period includes the period covered by the financial statements reported on by the firm. When an entity becomes an audit client during or after the period covered by the financial statements that the firm will report on, the firm should consider whether any threats to independence may be created by:

  • Financial or business relationships with the audit client during or after the period covered by the financial statements, but prior to the acceptance of the audit engagement; or

  • Previous services provided to the audit client.
  Similarly, in the case of an assurance engagement that is not an audit engagement, the firm should consider whether any financial or business relationships or previous services may create threats to independence.
       
42.

If non-assurance services were provided to the audit client during or after the period covered by the financial statements but before the commencement of professional services in connection with the audit and those services would be prohibited during the period of the audit engagement, consideration should be given to the threats to independence, if any, arising from those services. If the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include:

  • Discussing independence issues related to the provision of the non-assurance services with those charged with governance of the client, such as the audit committee;

  • Obtaining the audit client's acknowledgement of responsibility for the results of the non-assurance services;

  • Precluding personnel who provided the non-assurance services from participating in the audit engagement; and

  • Engaging another firm to review the results of the non-assurance services or having another firm re-perform the non-assurance services to the extent necessary to enable it to take responsibility for those services.
       

COMPLIANCE WITH THE IFAC CODE OF ETHICS

       
43. This Statement in conjunction with Guidance 1.308 "Independence for assurance engagements" are, in all material respects, consistent with section 8 of the International Federation of Accountants Code of Ethics for Professional Accountants issued in November 2001.
       

EFFECTIVE DATES

       
44. This Statement shall take effect:
  (a) for audits of financial statements for accounting periods beginning on or after 1 January 2004; and
  (b) for any other assurance engagements (including reporting engagements performed by reporting accountants) where the assurance reports are dated after 31 December 2004.
  Earlier application of the provisions of this Statement is encouraged.
       
45. This Statement supersedes paragraphs 1 - 3 of the "Statement" section and paragraphs 1 - 50 and 65 of the "Guidelines" section of Statement 1.203 "Integrity, objectivity and independence", now retitled "Conflicts of interest".